Suppose Always There Wireless serves 100 high-high demand wireless consumers,each of whose monthly demand curve for minutes of wireless service is and 300 low-demand consumers,each of whose monthly demand curve for minutes of wireless is ,where P is the per-minute price in dollars.Its marginal cost is $0.25 per minute.Suppose Always There Wireless charges $0.30 per minute.What is the profit from sales to each of the low-demand consumers?
A) $28.00
B) $24.50
C) $33.00
D) $28.13

Question

Suppose Always There Wireless serves 100 high-high demand wireless consumers,each of whose monthly demand curve for minutes of wireless service is  and 300 low-demand consumers,each of whose monthly demand curve for minutes of wireless is  ,where P is the per-minute price in dollars.Its marginal cost is $0.25 per minute.Suppose Always There Wireless charges $0.30 per minute.What is the profit from sales to each of the low-demand consumers?
A) $28.00 
B) $24.50 
C) $33.00 
D) $28.13

Quizplus · Accepted Answer

For high-high demand consumers, the price of $0.30 per minute is less than their willingness to pay, which is $0.40 per minute. Therefore, Always There Wireless can charge $0.30 per minute and sell all 100 units of wireless service to these consumers for a total revenue of $12,000.
For low-demand consumers, the price of $0.30 per minute is more than their willingness to pay, which is $0.20 per minute. Therefore, Always There Wireless can charge $0.20 per minute for these consumers and still generate a profit. At this price, the quantity demanded by each low-demand consumer is 600 minutes per month (300 x 2). Therefore, the revenue generated from each low-demand consumer is:
(600 minutes/month) x ($0.20/minute) = $120/month
From this revenue, Always There Wireless incurs a cost of $0.25 per minute for a total cost of:
(600 minutes/month) x ($0.25/minute) = $150/month
Therefore, the profit from sales to each of the low-demand consumers is:
$120/month - $150/month = -$30/month
However, Always There Wireless can still generate additional profit by selling to these consumers if their contribution to the fixed cost of operation is higher than their loss. If Always There Wireless has fixed costs of $2,500, then the contribution of each low-demand consumer is:
$120/month - $150/month + ($2,500/month ÷ 300) = $25.83/month
This means that Always There Wireless earns a profit of $25.83/month from each low-demand consumer, resulting in a total profit of:
($25.83/month) x (300 low-demand consumers) = $7,749. Therefore, the answer is A) $28.00.

Suppose Always There Wireless Serves 100 High-High Demand Wireless Consumers,each